Redefining the government tenant market

Aug 05, 2014

JSE listed property giant, Redefine Properties, may have ‘smuggled’ what could be a game changing view on government as a tenant in the South African investment property market.

Redefine, the property fund with a portfolio valued at R44.5bn, issued its financial results yesterday. Deep in the commentary of the glowing financial results, Redefine’s management plugged in an interesting paragraph.

“As a result of the structural change in listed property yields, the sale of the (Government tenanted office) portfolio has been put on hold. In terms of the Government policy, Redefine is renewing leases for three year periods whereas previously many of these were monthly tenancies or one year leases. These properties are no longer included in non-current assets held-for-sale.”

This comment will raise eyebrows. The Black Economic Empowerment (BEE) styled property firms will be unsettled. The comment could mean that the BEE party, around the government tenanted office market, is over.

That is not to say the three year leases referred to in the Redefine statement represent the core of the public sector lease market. The BEE players are turned on more by the longer term leases. But then if you speak to people in the BEE space they will tell you that they have seen a gradual shift away from affirmative action on public sector leases. Figures accounting for black representation in the massive R3bn per year government lease markets remain very low.

Redefine seems to be revisiting a decision to disinvest from the government tenanted office property market. This decision was taken about five years ago when government and in particular the department of public works (DPW) tightened the BEE screws.

The DPW, a custodian of government commercial property affairs, adopted a tougher affirmative procurement policy on leasing office buildings for government departments. Back then, the DPW developed a new BEE guideline alongside the BBBEE scorecard. The new guideline demanded that black landlords be favoured for long term leases.

 The introduction of this guideline caused a mini war of words back then. Established landlords, historically property investors, accused the DPW of pursuing narrow empowerment and of going against BBBEE scorecard. This is because the DPW emphasised black ownership above everything else.

A number of BEE styled landlords have emerged on the back of DPW’s affirmative action policy. These will include high flyers, like Sisa Ngebulana’s Rebosis, Sandile Nomvete’s Delta Property Fund and Shaun Rai’s Ascension Property Fund, who have since listed their portfolios on the JSE. There are others like the Moseneke family vehicle Encha Properties and Thoma’s Matlala’s Indite Property Fund. The controversial Roux Shabangu deals were part of this movement.

Rebosis, Ascension and Delta are talking a three way R16bn merger to consolidate their position for this market.

Just this week and releasing financial results for the year ended February, Nomvete was polishing the image of Delta as well positioned for this market. He said Delta continues to be well positioned for the acquisition of future government, parastatal and BEE sensitive tenanted buildings, due to its empowerment credentials. This is evident in the renewals of 25% of the leases in the existing portfolio. “The South African property market, especially in office space, is expected to remain challenging in 2014. However the Delta Board believes that due to the portfolio’s positioning, with the sovereign underpin and long lease expiry profile, it is largely shielded from many of the expected challenges.”

Rebosis was singing more or less from same him book in its latest results.

If the Redefine view is a sign of the future amongst the established landlords, the Government tenanted office market is about to get tighter. This is not by default. A low level battle for this market has continued since DPW introduced its policy. Tentacles of this battle can be witnessed from the recent statements issued by the South African Association of Property Owners (SAPOA).

Responding to the minister of finance Pravin Gordhan who accused the property industry of fleecing government through overpriced leases Sapoa fingered DPW’s policies.

Sapoa CEO said in a statement “This attack on the entire property industry is unwarranted and unfortunate.”

“Many of the issues raised stem from Government’s own inefficiency and mismanagement,” said Gopal.

He added that the alleged high rentals may be due to collusion between some landlords and civil servants which have been exasperated by the National Department of Public Works’ Property Management Strategy; a BEE, Job Creation and Poverty Alleviation Policy that has limited fair market competition. He added that the Department of Public Works’ (DPW) unwillingness to engage with large listed and institutional property owners adds to this problem.

Beneficiaries of the DPW affirmative action policy were not going to let such a comment slide unchallenged. The South African Institute of Black Property Practitioners (SAIBPP) reacted by saying malpractices on the DPW front were a result of badly implemented policy and not a result of the policy itself. SAIBP President Thomas Matlala said “The fact that the department has not implemented its own policies properly has created uncertainty in the market and in such instances malpractices creep in.”

He said the BEE supportive leasing strategy should not be faulted as it is in line with the country’s constitution, the BBBEE Act and the property charter. “It (the policy) has from 2008 to 2010 created R12, 5 billion listed on the JSE exchange. It has also created numerous unlisted black owned property companies, ensuring that the ownership patterns are varied.”

“The current ministry has failed to implement this strategy. This said Matlala has led to speculation by the industry and the department with no clear guide to follow. “This situation is directly linked to those in the department that are undermining the cabinet decision of 2006…”

The Black Association of Commercial Property Owners (BACPO) joined the fray. BACPO Secretary General Bruce Zungu issued a statement saying the organisation applauds governments efforts to root out corrupt practices at DPW. However, said Zungu, BACPO would like to caution all stakeholders not to lose sight of the overall challenge to transform the property industry by effectively administering and implementing current policy. “Hastiness to reorganize and drive effectiveness at DPW cannot be done at the expense of the transformation goal.”

We have in the past stated the need to effectively transform the South African property industry. As it stands, this industry is least transformed when it comes to ownership.” added Zungu.

He said the commercial property industry market value including government is valued anywhere between R1.8 trillion and R2 trillion. Of this less than 1% is in effective ownership of Black South Africans. The Government lease pie valued around R3 billion per year also sees less than 15% of this spend attributed to black property owners.

In essence the black players are saying the government tenant market needs more not less affirmative action. One wonders what they will read from the Redefine statement. While pinned on three year leases, it is not a statement that can be taken lightly. It comes from what is probably the most agile group of property professionals in the country under the leadership of Marc Wainer.

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Written by admin on May 8, 2014